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Geography of finance (or financial geography) is a branch of economic geography that focuses on issues of financial globalization and the geographic patterns of finance. It studies the effects of state sovereignty, culture and different kinds of barriers that affect the spatial distribution of finance, such as uneven development and financial exclusion, and the global and local connectivity of financial flows and networks. It also researches the creation of new financial centres around the world, both offshore and onshore. [1]
With the continuing process of globalization, some geographic barriers such as transportation costs of goods and capital are steadily decreasing. [2] However, many other kinds of geographic distance are still very present and relevant to explain spatial differences. [3] In the geography of finance, researchers analyse the effects of this distance on the distribution of the financial system across the world. Fields of research include culture and education, [4] technology, [5] the effects of tacit knowledge and relational proximity [1] and politics. [6] An interesting issue in the latter is the increasing entanglement of banks and nations, [7] which is closely related to geography of networks. [8] Furthermore, researcher analyse how and how strongly that current spatial distribution of finance affects the allocation of funds, capital and credit across different regions. [9]
The relevance of economic geography is already quite established in the academic world and research on the topic is in full progress. [10] However, geography of finance is now gaining individual focus, especially as the link between the financial economy and the real economy is losing strength. [11] This is emphasized by the existence of economic bubbles, and the fact that the value of financial transactions is often multiple times larger than the real economy. [12]
The September 11 attacks that targeted the World Trade Centre in New York City drew new attention to the geography of finance. Even though cities have more often been damaged by natural disasters or terrorist attacks, this attack was focused on the financial system and proved to have significant effects. The event led to a rethinking of the global geographical organization of the financial services industry and drew academic attention to the importance of such densely organized financial districts. [13]
The financial crisis of 2007-2008 also led to interesting developments in the geography of finance. It drew new attention to the field, as the crisis showed that local events could cause a global financial crisis that affected small businesses and local governments around the world. [14] The relocation of financial services that had already been occurring was amplified by this crisis, decreasing the importance of major financial centers like Wall Street in lieu of relatively new financial centers elsewhere around the world. [15]
The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution funded by 190 member countries, with headquarters in Washington, D.C. It is regarded as the global lender of last resort to national governments, and a leading supporter of exchange-rate stability. Its stated mission is "working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world." Established on December 27, 1945 at the Bretton Woods Conference, primarily according to the ideas of Harry Dexter White and John Maynard Keynes, it started with 29 member countries and the goal of reconstructing the international monetary system after World War II. It now plays a central role in the management of balance of payments difficulties and international financial crises. Through a quota system, countries contribute funds to a pool from which countries can borrow if they experience balance of payments problems. As of 2016, the fund had SDR 477 billion.
Economic geography is the subfield of human geography that studies economic activity and factors affecting it. It can also be considered a subfield or method in economics. There are four branches of economic geography.
One of the major subfields of urban economics, economies of agglomeration, explains, in broad terms, how urban agglomeration occurs in locations where cost savings can naturally arise. This term is most often discussed in terms of economic firm productivity. However, agglomeration effects also explain some social phenomena, such as large proportions of the population being clustered in cities and major urban centers. Similar to economies of scale, the costs and benefits of agglomerating increase the larger the agglomerated urban cluster becomes. Several prominent examples of where agglomeration has brought together firms of a specific industry are: Silicon Valley and Los Angeles being hubs of technology and entertainment, respectively, in California, United States; and London, United Kingdom, being a hub of finance.
International political economy (IPE) is the study of how politics shapes the global economy and how the global economy shapes politics. A key focus in IPE is on the distributive consequences of global economic exchange. It has been described as the study of "the political battle between the winners and losers of global economic exchange."
Charles Poor Kindleberger was an American economic historian and author of over 30 books. His 1978 book Manias, Panics, and Crashes, about speculative stock market bubbles, was reprinted in 2000 after the dot-com bubble. He is well known for his role in developing what would become hegemonic stability theory, arguing that a hegemonic power was needed to maintain a stable international monetary system. He has been referred to as "the master of the genre" on financial crisis by The Economist.
A currency crisis is a type of financial crisis, and is often associated with a real economic crisis. A currency crisis raises the probability of a banking crisis or a default crisis. During a currency crisis the value of foreign denominated debt will rise drastically relative to the declining value of the home currency. Generally doubt exists as to whether a country's central bank has sufficient foreign exchange reserves to maintain the country's fixed exchange rate, if it has any.
Financial contagion refers to "the spread of market disturbances – mostly on the downside – from one country to the other, a process observed through co-movements in exchange rates, stock prices, sovereign spreads, and capital flows". Financial contagion can be a potential risk for countries who are trying to integrate their financial system with international financial markets and institutions. It helps explain an economic crisis extending across neighboring countries, or even regions.
The G20 or Group of 20 is an intergovernmental forum comprising 19 sovereign countries, the European Union (EU), and the African Union (AU). It works to address major issues related to the global economy, such as international financial stability, climate change mitigation and sustainable development.
A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these panics. Other situations that are often called financial crises include stock market crashes and the bursting of other financial bubbles, currency crises, and sovereign defaults. Financial crises directly result in a loss of paper wealth but do not necessarily result in significant changes in the real economy.
Spatial inequality refers to the unequal distribution of income and resources across geographical regions. Attributable to local differences in infrastructure, geographical features and economies of agglomeration, such inequality remains central to public policy discussions regarding economic inequality more broadly.
The Panic of 1866 was an international financial downturn that accompanied the failure of Overend, Gurney and Company in London, and the corso forzoso abandonment of the silver standard in Italy.
In economics, a spillover is an economic event in one context that occurs because of something else in a seemingly unrelated context. For example, externalities of economic activity are non-monetary spillover effects upon non-participants. Odors from a rendering plant are negative spillover effects upon its neighbors; the beauty of a homeowner's flower garden is a positive spillover effect upon neighbors. The concept of spillover in economics could be replaced by terminations of technology spillover, R&D spillover and/or knowledge spillover when the concept is specific to technology management and innovation economics.
A global recession is recession that affects many countries around the world—that is, a period of global economic slowdown or declining economic output.
In economics and finance, rational herding is a situation in which market participants react to information about the behavior of other market agents or participants rather than the behavior of the market, and the fundamental transactions.
Janelle Knox-Hayes is the Lister Brothers Associate Professor of Economic Geography in the Department of Urban Studies and Planning at the Massachusetts Institute of Technology. Her research and teaching explore the institutional nature of social, economic and environmental systems, and the ways in which these are impacted by changing socio-economic spatial and temporal dynamics.
Hélène Rey is a French economist who serves as Professor at London Business School (LBS). Her work focuses on international trade, financial imbalances, financial crises and the international monetary system.
Edward J. Kane was an American economist and writer. He was a long-time student of incentive conflict in financial regulation and in crisis-management policies. His writing contends that too-big-to-fail policies are rooted in the cultural norms of major central banks around the world.
Gianmarco Ireo Paolo Ottaviano is an Italian economist and Professor of Economics at Bocconi University.
Paola Sapienza is an American and Italian economist. She is a member of the Kellogg School of Management faculty at Northwestern University. She is also a research associate at the NBER and CEPR. Her fields of interest include financial economics, cultural economics, and political economy.
Rüdiger Fahlenbrach is a German economist specialised in finance. He is a professor of finance at EPFL and holds the Swiss Finance Institute Senior Research Chair.